Industry Analysis

THE INTERNET SOFTWARE INDUSTRY


By ERIK WROBEL MBA
© May 1996 








Table of Contents: 

1. Introduction 

2. The Internet - a brief overview 

3. Life Cycle Analysis 

3.1 Industry Life Cycle 
3.2 Product Life Cycle 

4. Industry Competitors 

4.1 Microsoft 
4.2 Netscape 
4.3 Conclusion 

5. Strategic Position and Action Evaluation 

6. Potential New Entrants 

6.1 Upstart Companies 
6.2 Software Companies 
6.3 Companies in related industries 

7. Substitutes for Internet Software 

8. Power of Customers 

9. Conclusion and Industry Outlook

Sources Consulted

Appendix A

1. Introduction 

Many companies are trying to use the internet to make money. This can be done in a variety of ways such as by producing hardware (servers, peripherals, etc.), producing software (either programs specifically designed for the internet or programs that are internet compliant), providing content (selling information or services), internet marketing, consulting, and in numerous other ways. The development of the internet is still in its early stages and I am sure that we will see many innovative ways of using the internet as a means of earning money in the future. I have chosen to limit the scope of the analysis to companies that produce software for the internet since it is this segment that I am most interested in. I will focus on mass-consumption software rather than software developed and adapted for a highly specific purpose such as when a company, e.g. Bank of America or Federal Express, has software developed so that customers can handle transactions via the internet. 

Since I do not wish to waste time explaining what the World Wide Web is or what a browser is, I have decided to adapt both the style and the content of the analysis to a target group of people who it is assumed have a fair amount of knowledge about both the internet and the high-tech industry in general. 


2. The Internet - a brief overview 

It is estimated that there currently are 150 million PC users in the world. Of these 150 million, approximately 35 million (23%) have used e-mail and approximately 9 million (6%) have used the web. 75 percent of World Wide Web users are in the United States. 

Based on numbers from Intel it is estimated that by the year 2000 there will be 225 million PC users in the world. Approximately 200 million of these users will have e-mail access and approximately 150 million of them will have access to the World Wide Web. 

 
Figure 1: Number of PC users, e-mail users, and web users worldwide, 1995-2000. 

In percentage terms the number of PC users will increase by 56 percent in the period 1995-2000, the number of e-mail users will increase by 471 percent, and the number of web users will increase by a staggering 1,589 percent. The number of users on the internet is doubling annually. 

The people who use the internet are primarily young males. The average age of users is 32.7 years old, and 70.7% of users are male versus 29.3% female users. According to a recent survey, "users represent less and less the 'technology developers/pioneers' and more of what we refer to as the 'early adopters/seekers of technology'." The adopters do not typically have access to the web through work or school, but actively seek out internet access providers. The estimated average income across all users is $63,000. The majority of users have computer (29.1%) or educational (30.9%) occupations. 

In terms of geographical location, 76.2% of users are from the US, 10.2% from Canada and Mexico, and 8.4% from Europe, which leaves the rest of the world with only 5.2% of the total number of users. The majority of users (78.4%) use their browsers daily. Internet users spend an average of 5 hours and 28 minutes per week on the internet. The most common use of web browsers is simply for browsing (79.0%) followed by entertainment (63.6%) and work (51.8%). Only 11.1% of users use the internet for shopping. 

The current market for internet products and services is estimated to be 5 billion dollars. This is the 'new market' i.e. products and services directly developed for the internet. It includes software and hardware exclusively for internet use. In addition the market size of products and services indirectly benefiting from the growth of the internet, e.g. telecommunications equipment and PC's and servers, is approximately 11 billion dollars. That brings the total current market for products and services directly or indirectly related to the internet to 16 billion dollars. The size of the market for internet software is approximately 900 million dollars. 

It is estimated that the new market will grow to 36 billion dollars (49% compound annual growth rate) by the year 2000. The indirectly related market will grow to 43 billion dollars or 30% CAGR. That brings the total market size to 79 billion dollars with a CAGR of 38 percent. The internet software market will grow with a 41 percent CAGR to a total size of 5.1 billion dollars by the year 2000. That means a total increase of the internet software market by 467 percent over the five year period. It is estimated that sales of internet software will grow by 100 percent in 1996. 

 
Figure 2: Size of internet markets, 1995 and 2000. 

The internet thus seems destined for growth. The only thing that might hold it back is lack of bandwidth. Because most people connect to the internet using a regular phone line the transfer capacity is rather limited. In a GVU survey 33.7% of all users reported connecting using 14.4 kbs modems while 26.6% of users connected using 28.8 kbs modems. Only 23 percent of users connected at ISDN speed or higher. The remaining users either connected at speeds below 14.4 kbs or were unsure of their connection speed. In order to be able to receive high resolution graphics, audio, or video in good quality at real-time speed, it is necessary to have at least an ISDN connection (56 kbs). As the content on the internet becomes still more advanced in terms of graphics, audio and video, it will probably require a T-1 (1.5 mbs) connection to be able to receive the data at real-time speed. Whether the upgrading of the infrastructure can keep up with the speed with which the content on the internet develops is doubtful. 


3. Life Cycle Analysis 

3.1 Industry Life Cycle 

In his book "Contemporary Strategy Analysis" Robert Grant identifies two fundamental factors that drive industry evolution; 'Demand growth' and 'Creation and diffusion of knowledge'. In the initial stages of the introduction of a new product or technology there is usually little market growth. The industry's products are little known and there are a few pioneering firms and customers. In this stage technology advances rapidly and no dominant product technology has emerged. Following this stage is a transition from technological heterogeneity to increased standardization,- this transition is associated with the industry's growth phase. 

Applying this theoretical framework to the internet software industry places the industry between the introduction phase and the growth phase. One part of the industry has already moved full-scale in to the growth phase. The primary example of a software product in this category is the web-browser; demand for browsers is booming, industry standards are gradually emerging, and competition is narrowing down to fewer and bigger companies. Examples of software products and technologies that are still in the introduction phase and where no clear standards have been established include real-time video (currently being pioneered by companies such as White Pine Software and Xing Technologies) and VRML-browsers (produced by Virtual Realms, Netscape, and many other companies). 

As a whole though, the internet software industry must be said to be in the growth phase if measured by the number of people using internet software. The products that the industry produces are no longer only aimed at a relatively small, exclusive, and technically oriented part of the population as was the case just a few years ago. A lot of the software is now aimed at a broad consumer market and a mass-market is developing. It is estimated that sales of internet programs will grow by 100 percent in 1996. 

3.2 Product Life Cycle 

For the purpose of determining the life cycle of an internet software program it is most useful to view an internet program as being a particular version of a program, simply because a program might be around for a long time whereas a particular version will not. That way the pace at which the industry is developing will be more accurately reflected. 

There is not really any statistical data available about this subject, but a look at the browser market, which is probably the most developed internet software product market, should give a good indication of the present life cycle of internet programs. Excluding the releases of beta-versions, most of the larger companies that make browsers seem to have released approximately three official versions of their Windows based browsers. Since most of these companies have only been making browsers for about two years that would suggest that a new browser version is released every 8-9 months. Although it is difficult to substantiate whether this is the actual average product life cycle and whether it is valid for most other internet programs, a look at the many new releases of other internet programs seems to confirm that the life cycle is in fact less than a year. It also ties in well with the fact that technology is developing very fast in this industry and that it is therefore necessary for a company to continuously improve its products if it wants to remain competitive. 

One final aspect of the product life cycle model needs to be addressed; when a product or technology enters the declining stage of the life cycle, and where it can no longer can be sold in the home market, a company will often attempt to sell the product in a less developed or emerging market. This is especially true for technology products such as computers. However, in the case of internet software there is reason to believe that users all over the world will use more or less equally updated software - that at least seems to be the case now, primarily because most of the software can be downloaded for free on the World Wide Web. 

As the industry becomes more established and when standard platforms begin to emerge this might change since the dominating companies will then begin to charge for the software rather than give it away for free. One reason why it might be possible to sell 'out-dated' programs to less developed markets, is that the consumers in that market may not have the state-of-the-art hardware required to run the newest programs. At the present, however, the internet is not yet established enough in developing and emerging markets and the industry has not yet matured enough to judge exactly what will happen. 

4. Industry Competitors 

There are many software companies that produce internet related software. Almost all of the major software companies, such as IBM and Sun Microsystems, have begun to develop internet software. In addition many new companies have entered the industry. Most of the newcomers are still fairly small companies but some, such as Progressive Networks who makes the RealAudio player, are growing very fast. In the following two companies who both have a chance of becoming industry leaders will be analyzed. 

The two companies are: 

4.1 Microsoft 

Microsoft has been a late entrant in the internet software industry, and has long been accused of having an unclear strategy with regard to the internet. That began changing around mid 1995, and by the end of 1995 Microsoft had refocused its software development efforts and devoted more resources to developing and marketing its web-browser, the Microsoft Internet Explorer, and other internet programs. According to Bill Gates, Microsoft is now dedicated to developing software for the internet; "For Microsoft, the Internet is driving basically everything that we do". 

Microsoft's strengths 

Microsoft is well-positioned to become a major player in the internet software industry. First of all the company is very financially strong and therefore has the necessary resources to invest heavily in developing and marketing internet software. Table 1 shows some key financial figures for Microsoft. 


Table 1: Microsoft Corp. Key financial figures. In USD millions. 
1991 
1992 
1993 
1994 
1995 
Net revenues 
$1,843 
$2,759 
$3,753 
$4,649 
$5,937 
Net income 
$ 463 
$ 708 
$ 953 
$1,146 
$1,453 
Earnings per share  
0.82 
1.20 
1.57 
1.88 
2.32 
Return on net revenue 
25.10% 
25.70% 
25.40% 
24.70% 
24.50% 
Total assets 
$1,644 
$2,640 
$3,805 
$5,363 
$7,210 
Stockholders' equity 
$1,351 
$2,193 
$3,242 
$4,450 
$5,333 

With almost 6 billion dollars in revenue, a 25 percent net margin, and a projected R&D budget of close to 1,3 billion dollars in 1996, Microsoft can put far more capital behind its internet strategy than its competitors. The company also has a well-developed and mature organization with more than 18,000 employees and approximately 4,000 software developers. In terms of resources, Netscape vs. Microsoft is clearly a case of David vs. Goliath. 

Microsoft has already introduced several internet products, the most important of which currently are; the Internet Explorer Browser, the Microsoft Network, and the e-mail program included with Microsoft Exchange. The company also plans to sell server software, authoring tools, and a new version of the programming language Visual Basic, all designed for the internet. Currently other companies, notably Netscape, have better products on the market but Microsoft is gaining ground fast. The Internet Explorer for example, improved a lot from a rather inferior version 1.0 to a quite good version 2.0 in a short period of time. 

Microsoft has a 90%+ share of the market for operating systems for PC's with the company's Windows platform. This is very advantageous for Microsoft's attempt to capture a share of the internet software market for two reasons; First of all Microsoft can and will optimize its internet programs for use with the Windows program so that Microsoft's products are easier to install on Windows, are better integrated into Windows, and perform better on Windows than those of the competitors. Second of all Microsoft can bundle its internet programs with its other programs, primarily Windows, which will allow Microsoft to reach a huge market with very little marketing effort. Microsoft is already doing this with the Internet Explorer browser and MSN, thereby achieving huge cost savings over its competitors. Unfortunately for Microsoft (but not for the rest of us) the Department of Justice has taken note of the bundling and is looking into it. Finally Microsoft has a well-established brand name all over the world which will make it easier for the company to market and sell its internet software. 

Microsoft's weaknesses 

Because Microsoft has been a latecomer to the internet software market it has some disadvantages compared to its competitors. First of all most of its programs are not as sophisticated. Microsoft is still in the process of developing many of its internet programs and quite a few a still in beta-testing. And there is general agreement that the ones that have been released do not perform as well as competing programs. In other words, Microsoft is still playing catch-up. 

In the case of the MSN software it only works on the Windows 95 platform and Microsoft currently has no plans of releasing a Windows 3.1 version. Although Windows 95 will probably be the main platform in the future, Windows 3.1 is still the dominating operating system for an estimated 150 million Windows users worldwide. So far Microsoft has shipped approximately 15-20 million copies of Windows 95. That gives online service providers such as AOL who has software that runs on Windows 3.1, more time to consolidate the lead. 

Since many companies are beginning to build so-called intranets the market for internet server software and web authoring tools is also growing fast in this very lucrative area. Software for businesses is typically what software companies make the most money from and that will likely be the same in the case of internet software. A company making an intranet will need server software, client software, and web authoring tools and these three types of software all have to work together. The highest rate of compatibility and performance can obviously be achieved if all of the software is designed to work together and therefore companies will tend to buy the software from a software company that develops and sells all three. As of now Microsoft has only fully developed its browser and is still lagging behind in server software and authoring tools. This is probably one of the most crucial weaknesses for Microsoft since it means that the company is currently loosing out on the intranet market. 

Two final threats to Microsoft dominance remain to be mentioned. The first one is the ongoing investigation by the Department of Justice. The second one is Netscape to which we will now turn. 

4.2 Netscape 

Netscape Communications is the current leader in the internet software industry and Netscape's products, in particular the Navigator browser, are widely recognized as being the most advanced in the industry. The company "intends to be the premier provider of open software that enables people and companies to exchange information and conduct commerce over the Internet and other global networks". Netscape was founded in April 1994 by Dr. James H. Clark, founder of Silicon Graphics and Marc Andreessen, creator of the NCSA Mosaic browser. The company is strategically well-positioned to maintain its leadership position in the industry but is of course beginning to feel the heat from Microsoft. 

Netscape's strengths 

Netscape went public on August 9. 1995 with a great splash. The stock was introduced at $28 a share and soared to $75 a share the same day, making multimillionaires of its founders. By December the stock had reached a price of $171 per share but has since fallen to a more moderate level. Table 2 shows some of the key financial figures for Netscape. 

Table 2: Netscape Communications Corp. Key financial figures. In USD thousands. 
1994 
1995 
Net revenue 
$ 1,403 
$ 80,656 
Net income 
$-11,879 
$- 3,441 
Return on revenue 
N/A 
N/A 
Earnings per share 
-0.35 
-0.04 
Total Assets 
$12,925 
$227,748
Total Stockholders' Equity  
$ 5,344 
$173,350 

Netscape has succeeded in generating a lot of revenue during 1995 which has made it one of the fastest growing software companies in history based on first year growth. However the company is expanding at such a fast rate that it uses all of its capital to finance the expansion. 

One of Netscape's key strengths is its products. The fact that Netscape is the technology leader is an important factor in creating and sustaining the company's customer base. Netscape also has some of the best software developers, and, equally important, Netscape has two dynamic and creative leaders in the form of James Clark and Marc Andreessen. All of these factors will contribute to ensure that Netscape will remain successful although it doesn't necessarily ensure that Netscape will remain industry leader in terms of volume sales. 

Partially because Netscape has the best products and partially because the company was first to market, Netscape now has the largest installed base of web-browsers of all the companies that sell browsers. Its market share is estimated as being anywhere from 65 to 85 percent. Microsoft's share is estimated as being anywhere from 6 to 15 percent. Because both Netscape and Microsoft have been distributing their browsers for free it's impossible to know the exact numbers. Whether Netscape has gained critical mass remains to be seen. The company has a large market share in the existing market but since the market for internet software is set to grow at a rate of 100 percent per year over the next five years that could change very fast. But it does give Netscape a head-start over Microsoft and because Netscape has the largest installed base of browsers many web-pages are optimized for use with the Netscape Navigator. It also means that many companies have chosen to build their intranets around the Netscape standard. 

Netscape has a complete range of browsers, meaning that the Navigator is available for both Windows 3.1, Windows 95, UNIX and Macintosh. This is particularly important for companies setting up intranets since most companies have several computing platforms and therefore have to be able to communicate across platforms. 

And finally Netscape has the three key software products mentioned earlier (server software, client software, and web authoring tools), which means that Netscape is better able to serve the companies building intranets. 

Netscape's weaknesses 

Netscape doesn't have many weaknesses. It is essentially a well-positioned company with many strengths. It is only when it is compared to Microsoft that some relative weaknesses emerge. In many ways Microsoft's strengths turn out to be Netscape's weaknesses. 

Netscape's primary weakness is that it is not as financially strong as Microsoft. Although Netscape succeeded in generating a revenue of more than 80 million dollars in 1995 it doesn't seem very much when compared to Microsoft's revenue of 5,937 million dollars. Microsoft spent 860 million dollars on R&D and 1,895 million dollars on marketing in 1995 - Netscape spent 25 million dollars on R&D and 39 million dollars on marketing. Netscape has 257 employees - Microsoft has 18,000 employees. One should of course remember that all of Netscape's resources are devoted to internet software whereas Microsoft's resources are used for many different kinds of software (how much Microsoft spends on internet software exclusively is not known). But the disparity between the two companies in terms of resources is still enormous. 

4.3 Conclusion 

Whether Netscape can maintain the lead over Microsoft remains to be seen. Microsoft certainly has an advantage in terms of resources but Netscape may have an advantage in being a smaller company that can adapt to market trends faster. A lot might depend on whether Netscape can build customer loyalty among its existing users. There seems to be a general anti-Microsoft sentiment among both companies and users which might benefit Netscape in this respect. 

Figure 3: Strategic Group Map. 

Figure 3 shows how the two companies are positioned in a strategic group map where the two axis represent 'Product Range' and 'Geographical Scope'. Both companies are pursuing an international strategy, but since the internet is still far bigger in the US than anywhere else, the market primarily consists of American users. Microsoft has a far broader range of products than Netscape, so even if Microsoft doesn't become the dominant producer of web server and client software it will still have a dominant position in the software market. In the case of Netscape, web server and client software is the company's core products and the competition from Microsoft is therefore a bigger threat. 

Recently Netscape's stock tumbled when it was reported that Microsoft was negotiating a deal with AOL about distribution of Microsoft's Internet Explorer browser to AOL customers. But only a few days later Netscape announced a similar agreement, not only with AOL but also with CompuServe. Netscape has since announced more such agreements with other internet and online service providers. As Netscape increases its customer base among private users and, equally important, among corporate users building intranets, the company may gain a sufficient customer base to be in a standard setting position. Netscape has also announced agreements with CompuServe and Bell Atlantic where the latter companies will offer companies internet solutions using Netscape software. If Netscape can continue to match Microsoft's efforts in expanding the customer base among private users and in addition expand rapidly among corporate users, which, as argued earlier, is an area where Microsoft still lags behind in terms of software, then Netscape may be able to win the battle against Microsoft. For Microsoft and Bill Gates this is the first time in many years that the company has had to face really hard competition. 


5. Strategic Position and Action Evaluation 

The Strategic Position and Action Evaluation model (SPACE) is very useful for comparing the strategies and strengths of companies in an industry. The SPACE model takes both the internal company specific factors into consideration, as well as the external factors such as environmental stability and characteristics of the industry. The model can therefore be used to determine how competitors in an industry are positioned relative to each other, and how they are positioned to compete in the industry. 

Two dimensions are examined to determine a company's internal flexibility, and these dimensions are Financial Strength and Competitive Advantage. The external stability is examined along the two dimensions Industry Strength and Environmental Stability. Each dimension is composed of several factors that are analyzed and assigned numerical values. The average score of a particular dimension is then determined and can be combined with the other dimensions to form a four-sided polygon in a coordinate system. The polygon shows the strategic position and direction of a company in an industry and can then be compared to the strategic position of the competitors. 

In the following three companies in the industry will be analyzed: Netscape Communications Corp., Microsoft Corp., and Adobe Systems Incorporated. All of these companies have the potential to become industry leaders although not necessarily within the same segment of the internet software industry. The three companies all compete in the internet software industry but with different product ranges. Netscape focuses exclusively on internet software and the product line primarily consists of web browser software, web server software, and web authoring tools. Adobe makes information and document processing software and the company's internet software consists of authoring and publishing programs for the WWW. Microsoft has the widest range of internet software products, including all the types of software produced by the two other companies. The authoring and publishing software segment of industry is the only segment where all three companies are in direct competition with each other. In addition Microsoft and Netscape are competing head to head in the web server and client software market which is probably the most important and biggest segment of the market. 

Company Assessment 
ADBE 
MSFT 
NSCP 
1. Factors determining competitive advantage (CA) 
Market share 
5 
2
6 
Product quality 
5 
3
5 
Product life cycle 
5 
5
5 
Product replacement cycle 
2 
3
3 
Customer loyalty 
5 
4
5 
Competition's capacity utilization 
2 
5
3 
Technological know-how 
5 
5
6 
Vertical integration 
4 
6
4 
Average (-6): 
-1.9 
-1.9
-1.4 
2. Factors determining financial strength (FS) 
Return on investment 
4 
6
1 
Leverage 
5 
5
4 
Liquidity 
5 
6
4 
Capital required/capital available 
5 
5
3 
Cash flow 
4 
5
4 
Ease of exit from market 
4 
4
1 
Risk involved in business 
2 
4
1 
Average: 
4.1 
5
2.6 
A more detailed analysis of the numerical values assigned to each factor for both the industry and the individual companies can be found in Appendix A. 

 
 

Adobe and Microsoft both display an aggressive posture. Both companies are financially strong which is critical in an industry as turbulent as the internet software industry. That they display a similar posture does not, however, mean that they are competitors on an equal basis. As was mentioned earlier, the two companies have quite different product lines and Adobe's posture reflects the company's position within a relatively small segment of the industry whereas Microsoft's posture reflects the company's position in a much broader segment of the industry. The theory for the SPACE model suggests that companies with an aggressive posture should look for acquisition candidates, focus on increasing market share, and concentrate resources on products with a definite competitive advantage. This correlates well with both Adobe and Microsoft. Adobe has acquired Frame, Mastersoft, and Aldus, and Microsoft has acquired SoftImage and Rendermorphics and has attempted to (and failed at) acquiring Intuit. Microsoft is also attempting a merger with Vermeer (a company that creates web authoring software) but the Department of Justice is currently looking into the proposed merger so it is uncertain whether the merger will succeed. Both companies are essentially trying to complement existing product lines without having to go through a long period of developing the products and acquiring the necessary technology and knowledge. By acquiring existing companies, Adobe and Microsoft can skip the first part of the learning curve which buys time,- time that can then be used to gain market share and thereby obtain a strategically advantageous position in the industry. This is of course a costly way of expanding and requires that the buyer is financially strong. Otherwise the buyer risks financial over-stretch because of liquidity problems and because a company that extensively finances expansion through borrowing will become increasingly sensitive to increases in interest rates. But Adobe and Microsoft are financially strong and can afford to expand this way. 

The critical factor for both Adobe and Microsoft is entry of new competitors and both companies should use their financial strength to expand and to create competitive advantage, which is what they are doing. 

Netscape has a competitive posture. According to the theory, "the company enjoys a competitive advantage in a relatively unstable environment. The critical factor is financial strength". The theory suggests that Netscape should attempt to acquire financial resources to increase marketing thrust, extend and improve the product line, and protect the competitive advantage. This is exactly what Netscape is doing. Netscape is using the capital-injection from the stock offering to expand at a rapid rate. The company has acquired Collabra, a software company that makes groupware (similar to Lotus Notes) in order to be able to offer companies a more complete network solution. In addition Netscape continues to release new versions of both its browser and server software and has decided to support an open platform, all in an attempt to maintain the position as industry leader. Along with this expansion strategy the company is developing proprietary protocols and program extensions so that it will become more difficult for users to switch to competing products, i.e. Netscape is protecting its competitive advantage. 

In conclusion it appears that all three companies are leveraging their strengths quite effectively. Adobe may be the one that is best positioned because of the company's clear strategic focus, and because it has both financial strength, excellent products, an established customer base, and an international sales and distribution network that is already in place. Adobe is well-positioned to expand and defend its position within its market segment. Microsoft and Netscape are also leveraging their strengths well. Both companies want to be industry leader, but as their respective position in the space model clearly shows, they are following two very different strategies in the pursuit of their objective. Microsoft is aggressively expanding by using the company's financial strength, whereas Netscape is trying to protect its competitive advantage and use it as basis for further expansion. The SPACE model doesn't support any conclusions as to which company will be more successful at achieving the objective of becoming industry leader. In this case both companies have positioned themselves well and are trying to take full advantage of their strengths. 


6. Potential New Entrants 

The internet software industry is a very open industry and the barriers to entry are as a whole very low. The best evidence of this is the many new programs being offered by small upstart companies on the internet. Potential new entrants into the industry can be divided into three groups:  Finally it should be mentioned that some companies in unrelated industries may wish to enter simply because they see the internet software industry as being a future industry. These companies would most probably be fairly large and have extensive financing capability since entering the industry would mean starting from scratch. But currently the two first categories are where most new entrants are coming from. 

6.1 Upstart Companies 

Several companies such as Netscape, Progressive Networks (inventor of the RealAudio player), NaviSoft, Spyglass, and many others who didn't even exist a few years ago are now important players in the internet software industry. There are four reasons why they have been able to enter the industry relatively easy. 

First of all the barriers to entry are low. Developing new and fairly small software programs isn't very capital intensive. With a few good developers and some computers a company can make a prototype of a program which can then be distributed inexpensively via the internet. 

Secondly, the market is growing so fast that there is still room for many competing companies. Practically no standards have been established yet so the consumers are still open to new products and new standards. 

Thirdly, one of the traditional problems for upstart companies has been to finance the development and production of products but in the case of internet software companies they seem to be practically swamped by venture capitalists. According to BusinessWeek, "venture-capital investment in Net-related companies will triple from last year's 42 million dollars" during 1996 as venture capitalists try to seek out the next Netscape. As Bill Pendley from the internet service provider 'Digital Express Group' has said: "Everybody wants to give you money". A quite unusual phenomenon for startup companies but one that is definitely contributing to the fast growth of the internet. 

And finally, the fact that there are no big established competitors in the internet software industry has meant that startups haven't faced any real threat of retaliation. As a whole the industry still remains very open for startup companies wanting to enter the industry. 

6.2 Software Companies 

Many of the established software companies such as Microsoft, Sun Microsystems, Adobe, and Quarterdeck have entered the internet software industry. No software company can afford not to rethink its software strategy in terms of the internet and adapt its programs for use with the World Wide Web. The line between traditional software and internet software will likely become increasingly blurred as more software companies make changes to their programs so that the programs can be used with the internet. Microsoft, for example, is making changes to MS-Word and MS-Excel so that it will become easier to publish Word and Excel documents on the web. Adobe has recently released a new version of its Acrobat Reader, the Acrobat Amber Reader, that works as a plug-in with Netscape Navigator so that acrobat files can be viewed with the browser while on the internet instead of users having to first download the files and then view them with a special program. Games manufacturers such as 3D-Realms (DukeNukem) and ID Software (Doom II) have made changes to the games so that they can be played as multi-player games on the internet. 

A common characteristic of these programs is that none of them are programs exclusively designed for the internet, rather they are programs whose capabilities have been extended so that they will also work on the internet. Over the next few years we should see all the established software companies gradually developing new software for the internet and/or adapting their existing software for use with the internet. 

6.3 Companies in related industries 

Computer companies like Compaq, Dell, and Gateway may decide to enter the internet software industry, but at the present there is no indication that they intend to do so and it doesn't seem very likely that they will do so at a later stage either. Software is simply not their core business. 

Manufacturers of peripherals such as Creative Labs (sound cards) and US Robotics (modems) are more likely to enter the industry. Creative Labs already makes software for the company's sound cards and of course has great knowledge about audio technology so developing software that handles audio on the internet would not be such a big step for the company. The same holds true for US Robotics and communications software. US Robotics is considered industry leader and other computer companies as well as consumers are likely to accept industry standards proposed by US Robotics. 

The internet software industry will probably see many new competitors entering the industry during the next few years. The industry remains very open to new entrants although in the course of the next five years, as companies and standards become more established, that is likely to change. All the established software companies will probably enter the industry either with new software or with existing software that has been adapted for use with the internet. 

Because of the great number of companies entering the industry it doesn't seem likely that there will be a Microsoft-like monopoly in the internet software industry. It is of course still to early to tell whether Microsoft will succeed in also dominating this part of the industry or whether a company like Netscape will get a virtual monopoly in the browser market. But as it looks now the internet software industry will be more diverse than the traditional software industry has been. 


7. Substitutes for Internet Software 

Identifying substituting products or technologies for all products in an industry as diverse as the internet software industry is no easy task. It is difficult to imagine any type of product or technology that could substitute all other products in the industry. Obviously there are substitutes for individual programs such as e-mail programs (substitutes: telephone and 'snail-mail'), news programs/retrievers (substitutes: newspapers and television), and several other types of programs. But there doesn't some to be one all-encompassing substitute. 

Alternatively one could look for substitutes for the internet itself, simply because a shift away from the internet to some other type of medium will have similar consequences for the industry as a substitute for internet software would have. But there doesn't seem to be an alternative to the internet that offers the same possibilities as the internet does. The only viable alternative seems to be interactive TV but according to many people in the industry that won't come until in the distant future. Executives from both the software companies, such as Sun Microsystems, and the companies that would provide the content of interactive TV, such as Time Warner, say that they have either dropped or postponed their original plans for interactive TV and are focusing on the internet instead. The same is true of other software companies: "Technology companies such as Microsoft Corp., Oracle Corp. and Silicon Graphics Inc. -- among the biggest boosters of interactive TV a few years ago -- have re-engineered those systems for the global computer network." And when interactive TV finally becomes a reality it will most likely not be as an alternative to the internet but rather as an extension. James Clark, co-founder of Netscape Communications, says: ''The Internet is interactive television on training wheels. Unquestionably, interactive television will come right out of the Internet.'' 

There is one product that at least to a certain extent can function as a substitute for other internet programs, namely the Java program developed by Sun Microsystems. Since the Java program is itself software developed for the internet it obviously follows that it does not serve as a substitute for internet software. What it does, or has the potential to do, is to serve as a substitute for many other internet programs. 

What is Java? "Java is a simple, object-oriented, multi-threaded, garbage-collected, secure, robust, architecture-neutral, portable, high-performance, dynamic programming language." To put it in more simple terms; Java is a programming language designed for network computing. There are two key features that distinguish Java from other programming languages and programs in general:  The ability of Java to work across platforms (no matter if its UNIX, Windows, Macintosh, or some other platform) will enable users of different platforms to work together in ways that have never before been possible. That a programmer can make applets with Java has two consequences: First of all internet users won't need to have different programs for handling different kinds of data - as long as they have the Java program they only need to download the applet and that is done automatically when the data is retrieved. That leads to the second consequence, namely that Java could potentially eliminate the need for so-called 'bloatware'. Bloatware is programs such as the Microsoft Office Suite that take up a tremendous amount of harddisk, often quite unnecessarily since most users don't use all of the programs and certainly not at once. Carl Forsythe, webmaster at Monterey Bay Internet, who has tried programming with Java says that it is possible to make comprehensive advanced programs such as word-processing programs similar to Microsoft Word with Java. 

The Java program may therefore become a substitute for other internet software programs. However, the potential of the Java program is a much discussed subject and some consider the potential of Java to be overrated. It remains to be seen whether Java will live up to the high expectations. 

One final substitute needs to be mentioned, namely online services such as America Online, CompuServe, and Prodigy. The advantage of online services is that they provide a well-organized, easy to use, and rather comprehensive service as opposed to the much more disorganized World Wide Web. All the various services that are provided are integrated into one software program and users can get support from technical staff. But because there is so much more information available on the internet the online services will never be able to out-compete the internet, which is why they have decided to embrace it rather than compete against it. During the past year all of the online services have integrated a web-browser in their software package. So although the online services and their proprietary software will remain a threat to the internet software industry the general tendency is for the online services to make their software compatible with the internet and internet programs. An example of this trend is the recent decision by both America Online and CompuServe to license the Netscape Navigator web-browser from Netscape. 


8. Power of Customers 

The buyers of internet software are generally in a strong position vis-à-vis the producers of the software. Many, if not most, of all internet software programs can still be downloaded for free on the internet. To mention just a few key programs: Netscape Navigator, Eudora, CU-SeeMe, RealAudio, Shockwave, Internet Explorer, and many others. Of course in quite a few cases the programs are not distributed in their complete or optimal versions, rather the complete versions the customers have to pay for. But the programs distinguish themselves from traditional shareware in that they are usually rather comprehensive and are almost fully, and sometimes completely, functional. That means that customers have gotten used to getting their internet software for free. 

Because the same type of program, e.g. browsers or e-mail programs, can often be obtained from different software producers, it is relatively easy for customers to switch to a different software producer and thus it is difficult to get customers to pay for internet software. Things are made even more difficult for the software manufacturers by the fact that it is so easy for users of the internet to obtain programs from competitors - just by doing a simple search and then downloading, the user can have the program within minutes. 

Lack of information about the availability and performance of competing products usually serves as a barrier to buyers frequently switching products. The easy access to information on the internet hasn't completely eliminated this barrier but it has certainly diminished it. Customers can get information about new and existing products many places on the internet, for example on the homepages of the various software makers, in newsgroups, or on the homepages of some of the computer magazines. 

The point is that it has so far been difficult for software companies to actually transform the popularity of an internet software program into revenues, and, more importantly, into a positive income. Apart from the reasons mentioned above regarding the power of customers, an important factor has been that most companies have been willing to accept a tradeoff between income and market share to the benefit of the latter. This has been done in order to gain critical mass in a segment of the market so that a company could establish itself as industry leader within that segment and thereby get the lucrative opportunity to be standard setting and develop widely accepted proprietary standards. 

However, the power of buyers is beginning to diminish, primarily because of two changes that are taking place in the industry. First of all, the effort of some of the companies that have been postponing income in order to gain market share is beginning to pay of. Some companies have now succeeded in establishing widely accepted standards and although no company can claim to be 'safe' from competing standards, more customers are now willing to pay for the privilege of using specific software programs. 

Secondly, the number of corporate users of the internet is increasing rapidly. The has further accelerated the standard setting in the industry since users wanting to access the network or intranet of the corporate user need to have client software that is compatible with the software used on the server. Often the company in question will also by client software licenses for their employees or customers thereby contributing to establishing standards. 

There is no question that still fewer of the major software programs will be available for free on the internet. As standards become established some programs will become indispensable for users and software companies will then begin to charge for use of the programs. However, the nature of the internet (easy access to information about competing products and the multitude of competitors) is such that consumers will most likely continue to have more power than they traditionally have had in the software industry. 


9. Conclusion and Industry Outlook 

The internet software industry is the fastest growing segment of the software industry. And by most estimates the industry is still in the early stages of the growth cycle. This means that the industry provides plenty of opportunities for both established software companies and new upstart companies. But because it is still a new industry undergoing constant transformation, the structure of both the market and the industry is changing rapidly. Currently no company has succeeded in establishing a truly dominant position in the market. Netscape, which is probably the company that comes closest to such a position, is being pursued relentlessly by Microsoft. And even if Netscape manages to maintain the lead over Microsoft, there is still no guarantee that Netscape will not be leapfrogged technologically by a third company. In an industry where technology is such a crucial component of success and where the technology is advancing at such a high pace, no company is protected from sudden changes in the market structure. We therefore have an industry that is rather unpredictable and therefore associated with high risk, but it is also an industry that provides plenty of opportunities for companies. 

Two trends in the industry are bound to become more pronounced within the next 1 to 2 years. One is the move towards greater standardization and the establishment of common platforms on which to run other smaller internet programs. This platform will most likely be based on a web browser, which is why it is so important for Microsoft to dominate in this segment of the market. The browser that 'wins' will become the front end to the internet and will be to the communications enabled PC what Windows is to the regular functions of a PC. This of course presumes that the market will standardize on only one or two browsers which is what industry analysts believe is the case. Standardization will also occur with other types of internet software and in this process some of the smaller competitors are likely to be weeded out. This leads directly to the second trend. As some of the more successful companies succeed in establishing standards, there will be a move towards consolidation in the industry. The financially strong companies will buy the smaller companies and consolidate their position in the industry in that way. Steps in this direction have already been taken by Microsoft and other companies, but not to the same extent as has been the case with multimedia software companies in recent years. And it is very likely that in this respect the internet software industry will develop in the same way as the multimedia software industry has. 

Sources Consulted:

Browserwatch  

BusinessWeek, October 23, 1995. Looking for the next Netscape, by Amy Cortese. PP. 110-114. 

BusinessWeek, Dec. 4. 1995. The Software Revolution, by Amy Cortese. PP. 78-90. 

BusinessWeek Jan. 8. 1996. The Web Keeps Spreading, by Neil Gross. P. 92. 

BusinessWeek, January 29, 1996. More Internet IPOs, Anybody? by Gary Weiss. PP. 60-61. 

The Commercenet/Nielsen Internet Demographics Survey, 1996 

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Grant, Robert M., Contemporary Strategy Analysis. Blackwell Publishers, Cambridge Mass. 1995. PP. 231-45 and 258-60. 

GVU's WWW User Survey 

Mason, Rowe, and Dickel; Strategic Management & Business Policy. Published by Addison-Wesley. PP. 196-203. 

Microsoft annual report 1995 

Microtimes Feb. 5. 1996, # 147. Industry Insight: Microsoft and the Internet, by Paul Hoffman. P. 14. 

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Meeker, Mary and Chris DePuy; The Internet Report. Morgan Stanley. Published by HarperBusiness, New York, 1996. 

Netscape, Balance sheet 

Netscape's Mission 

Online Access, Battle of the Web Browsers., February 1996. By Michelle V. Rafter. P. 45. 

PR Newswire, Compuserve to market customized Netscape Navigator to corporate customers. March 11, 1996.. 

PR Newswire, Bell Atlantic And Netscape Announce Licensing Agreement. April 10, 1996. 

Wall Street Journal Homepage, special topic: the internet. An Autopsy on the 'Next Big Thing': How the Web Toppled Interactive TV, Thursday, March 28, 1996. By Bart Ziegler. 

Wolk, Martin; Microsoft aims to keep heat on Netscape. March 8, 1996. Reported by Reuters. 

Interview with Carl Forsythe, part-owner of Monterey Bay Internet, April 5 1996.